Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed Uzbekistan-based JSC Insurance Company Kafolat’s Insurer Financial Strength (IFS) Rating at ‘BB-’. The Outlook is Stable.

The rating reflects the state ownership, the insurer’s moderate business profile and the record of sound profitability in recent years. These strengths are offset by the high investment risks on the asset side.

The Uzbek state and state-owned companies hold a combined 93% interest in Kafolat, with the Agency for Management of State Assets of Uzbekistan holding 66.51% at end-6M19. As part of the new economic policy framework, the Uzbek government announced its intention to cede control in Kafolat, without giving any details on the timescale or cession strategy. Fitch does not expect this to happen in the short term.

Fitch views Kafolat’s business profile as moderate compared with other Uzbek players. This assessment is driven by Kafolat’s favourable competitive positioning and moderate business diversification. Kafolat is the sixth-largest insurer in Uzbekistan, with a 7% market share by gross written premiums (GWP) in 2018 (2017: 9%). In international terms Kafolat is a small domestically focused insurer with GWP of USD13 million in 2018, at the average exchange rate of the Central Bank of Uzbekistan.

In 2018, large one-off contracts in property and casualty lines and to a lesser extent, steady volumes of the inwards insurance enhanced Kafolat’s business mix diversification. The voluntary lines outweighed the compulsory lines, which include in particular workers’ compensation, and accounted for 51% of GWP and for 53% of net written premiums (NWP) compared with 31% and 30% in 2017.

In 1H19, Kafolat intensified writing of financial risks, which mainly included credit default insurance of farm equipment loans, with the share of financial risks growing to 23% of NWP in 6M19. The sum insured under this line equalled UZS460 billion in 1H19, which was six times as much as the insurer’s total shareholders’ funds at end-6M19. Fitch considers that the non-core nature of these risks is credit negative. This risk is mitigated by the presence of the government guarantees under this line. The Uzbek government is committed to compensate any losses exceeding 10% of the insurer’s shareholders’ equity and stemming out of this line.

In Fitch’s view, Kafolat’s investment portfolio carries several significant risks, which include a high and growing exposure to equity instruments representing 82% of the total investments at end-2018 (end-2017: 61%) and a major concentration per single issuer within the portfolio of equity holdings. The fixed-income part of the insurer’s portfolio is mainly formed of bank deposits, which are reasonably well diversified and mainly placed with the state-owned banks.

Kafolat had sound profitability, reflected in net income of UZS9 billion and return on equity of 9% in 2018. The net result was fully driven by strengthened investment component of UZS15 billion. The insurer’s underwriting result was negative, with the combined ratio growing to 100.9% in 2018 from 93.2%, driven by the commission ratio. Kafolat continued to report a very strong and stable loss ratio, which averaged 24% and varied between 18% and 31% in 2014-2018. This performance was recorded across all key lines of business, with the workers’ compensation the only exception.

Kafolat has strong capital relative to its business volumes. However, the capital remains exposed to equity investments and to heightened risk related to the 25% weight of the revaluation reserve made for tangible assets in the capital at end-2018. The insurer carries a comfortable buffer in its regulatory capital, with a Solvency I-like margin of 291% at end-2018.

A change in Fitch’s view of the financial condition of the Republic of Uzbekistan is likely to have a direct impact on Kafolat’s rating.

Sustained reserving deficiencies or underwriting losses leading to operational losses or capital depletion could lead to a downgrade.

Any significant change in the insurer’s relations with the government would also be likely to directly affect its rating.